The Biggest Losers If T-Mobile and Sprint Merge

T-Mobile (NASDAQ: TMUS) and Sprint (NYSE: S) are reportedly close to agreeing on terms to merge their businesses . The combined wireless carrier would have about 130 million customers, nearly as many as both AT&T (NYSE: T) and Verizon .

If a merger goes through, the companies will undoubtedly tout the cost-saving synergies they can realize by combining each company’s assets and customer bases. A lot of those cost savings will come from consolidating their wireless networks, which is bad news for a couple of wireless infrastructure companies. Cell tower companies like Crown Castle International (NYSE: CCI) , American Tower (NYSE: AMT) , and SBA Communications (NASDAQ: SBAC) all stand to lose substantial business if T-Mobile and Sprint join forces.

Image source: Getty Images.

Consolidation is their biggest risk

Each of the three tower companies listed above name industry consolidation as one of their biggest risks in their annual 10-K filings with the SEC. They all notably suffered setbacks when AT&T bought Leap Wireless, Sprint bought Clearwire, and T-Mobile bought MetroPCS. The impact could be even greater considering the relative size of T-Mobile and Sprint compared to a company like Clearwire.

The following table shows how much revenue each tower company derives from T-Mobile and Sprint.

Company

Percentage of Revenue From T-Mobile

Percentage of Revenue From Sprint

American Tower

9%

11%

Crown Castle International

23%

19%

SBA Communications

17%

16%

Data source: Company 10-K filings. Table source: Author.

American Tower is most insulated from consolidation in the U.S. industry with more international efforts . That said, the wireless markets in India and Brazil (American’s largest markets outside of the United States) could see some consolidation of their own over the next few years.

Despite its name, Crown Castle International is most exposed to the U.S. market of the three tower companies examined here. As such, it has the most to lose from a T-Mobile-Sprint merger.

Exactly how much revenue is at risk?

Not all of T-Mobile and Sprint’s cell sites overlap, but a lot of them do. Additionally, Sprint’s 2G network will likely be some of the first sites decommissioned as the company looks to use that spectrum for LTE and 5G deployment and rely on T-Mobile’s existing infrastructure for 2G if necessary.

As the company most exposed to the U.S. market, Crown Castle could lose around 8% of its revenue from a merger, according to Morningstar analyst Petra Vacval. By comparison, she expects American Tower and SBA to lose just 4% and 5% of revenue, respectively. Keep in mind those losses will come over a long period of time due to the long-term contracts the tower companies put in place.

One thing worth noting is that SBA generally avoids master lease agreements, which means its revenue is more closely tied to the actual build-out of a carrier’s network. The company saw the impact of Sprint’s lower capital expenditures over the last couple years. If Sprint and T-Mobile merge, it may slow the building out of the wireless networks, more quickly reducing the value of SBA’s existing contracts.

All three tower companies stand to lose a significant amount of revenue from a T-Mobile-Sprint merger. American Tower is most insulated, but it’s also exposed to some markets where it could face similar issues in the near future.

While Crown Castle is most exposed to the risk, that risk is mostly baked into its price by now. Furthermore, it’s hard to see further consolidation in the industry with three major players of about equal weight. As such, investors should pay attention to how the stock reacts to news about the potential T-Mobile-Sprint merger. An over-reaction in the market could be a good buying opportunity.

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